By Karen Langley
U.S. stocks have staged a furious rebound since late March,
leaving global markets behind.
Optimism about state and business reopenings and the potential
development of a coronavirus vaccine has lifted the S&P 500 36%
from its March low, cutting its losses for the year to 5.8%. The
index rallied 3% last week to cap its best two-month stretch since
2009.
The Stoxx Europe 600, meanwhile, is down 16% in 2020, and Hong
Kong's Hang Seng Index is off 19%.
Investors point to a booming technology sector and an
unprecedented amount of stimulus from the Federal Reserve as
reasons for the outperformance. The percentage of fund managers who
deem U.S. stocks attractive has risen to the highest level in
nearly five years, according to a recent Bank of America Global
Fund Manager Survey.
The bank said its May survey found a net 24% of respondents were
overweight U.S. stocks, the most since July 2015. Meanwhile, the
net share who were overweight eurozone and emerging market equities
fell to the lowest levels since July 2012 and September 2018,
respectively.
"It's not so much U.S. versus Europe versus Asia-Pac. It's
really new economy versus old economy," said Olivier Sarfati, head
of equities at GenTrust, adding that the dominance of a handful of
big technology stocks in the U.S. is partly responsible for the
divide.
Investors this week will parse the May jobs report for further
clues about the state of the labor market. They will also review
the quarterly reports of companies including Campbell Soup Co. and
J.M. Smucker Co. for insights into consumer behavior during the
pandemic.
U.S. market dominance isn't a recent phenomenon. The S&P 500
has outpaced most other stock indexes around the world since the
financial crisis. The index has climbed 350% since March 9, 2009,
while the MSCI All Country World Index, excluding U.S. stocks, has
gained 89%.
Some investors question whether such a sustained stretch of
outperformance can continue indefinitely. Markets have a tendency
over extended periods to swing back toward long-term trends, a
phenomenon known as mean reversion.
The recent U.S. rally, in conjunction with projections for a
sharp drop in corporate earnings this year, has made stocks more
expensive than they have been in almost two decades. That makes a
case for investing overseas, some fund managers say.
The S&P 500 traded Wednesday at 21.85 times its expected
earnings over the next 12 months, the highest level since June
2001, according to FactSet and Dow Jones Market Data. That compares
with 18.24 times for the Stoxx Europe 600 and 10.70 times for the
Hang Seng.
"Unless you think the entire market and the entire economy is
going to grow much faster, it's harder to justify starting from a
higher multiple, " said Danton Goei, portfolio manager at Davis
Advisors. "Starting from a more expensive point just means that
there's a likelihood that the international stocks outperform."
Investors fled stock funds during the market rout of February
and March- -- and have bailed on some regions at a faster pace than
others. As of Wednesday, U.S. equity funds had cumulative outflows
since the beginning of 2020 of 0.4% of assets under management,
compared with outflows of 3% for emerging markets equity funds and
2.4% for Western European equity funds, according to EPFR.
Part of the allure of U.S. stocks is tied to the hunt for yield,
as government-bond yields hover near record lows. The S&P 500's
dividend yield is 1.9%, well above the 0.650% of the 10-year
Treasury note. Yields in much of Europe and Japan are negative.
The recent U.S. rally has been largely driven by a surge in big
tech stocks. The sector is the best-performing group in the S&P
500 this year, up 6.7%. Microsoft Corp. and Apple Inc., the two
biggest U.S. companies by market value, have advanced 16% and 8.3%,
respectively.
Tech makes up about 25% of the index, compared with 10% of the
MSCI all-country index. Financial shares, by contrast, make up only
about 10% of the U.S. benchmark, while accounting for 20% of the
global index. Those shares, pressured by central banks' cuts to
already low interest rates, have lost 24% in the S&P 500 in
2020.
Some investors say the recent stay-at-home orders during the
pandemic will only accelerate the dominance of the tech and other
fast-growing companies that are heavily weighted in the U.S.
market.
"It's done more to accelerate the digital trend that we've seen
over the last 10 years than anything else could have done," Mr.
Sarfati of GenTrust said of the pandemic.
GenTrust, which has about $3 billion under management, had
limited its investment in stocks because of their hefty price tag
but bought again in late March. The firm has focused on tech shares
in emerging markets as well as U.S. shares that are part of the
"new economy" -- companies that can grow very fast with relatively
fixed costs, Mr. Sarfati said.
"When we increased risk, we focused on what we thought were
going to be the net long term beneficiaries of the tech
acceleration," he said.
At the end of April, investment manager T. Rowe Price Group
trimmed its position in overseas stockholdings in its multiasset
portfolios, said Tim Murray, capital markets strategist in the
multiasset division. He said the move was prompted both by the
cyclical nature of overseas markets -- which makes them more
exposed to an economic retreat -- and by stronger stimulus measures
in the U.S. than in other countries.
"We've had a sharp slowdown globally," he said. "We don't expect
the recovery to be as fast as the slowdown. So we expect economic
growth to be impaired for quite a while."
Write to Karen Langley at karen.langley@wsj.com
(END) Dow Jones Newswires
May 31, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.